The TV industry will unravel faster than you think.

I appeared on Cheddar TV a few weeks ago to talk about venture capital, virtual reality, and a few other topics with Jon Steinberg and his team. Cheddar is building an internet-native news network: it broadcasts live on Facebook via its new Live product, and then archives footage on social platforms like Medium. It seeks to reinvent financials news for the millennial generation.

I took a few moments after the broadcast to wander around the NYSE floor, peeking into booths of Fox News, Squawk Box, and their brethren. The experience got me thinking about the future of the TV industry, and how much of it would look more like Cheddar in a few years.

TV executives aren’t dumb. Several have commented that “over the top” (OTT) programming is changing the industry. But, they believe (mistakenly) that, when OTT is mainstream, they will implement their own OTT strategy and everything will be fine. They imagine the future of TV will look something like this:

Power law problems

The network effects that have bolstered the TV networks of old will begin to unravel in the next 5–10 years. The business model of TV suggests that the larger the audience you serve, the better a deal you can cut with advertisers & distributors, and the more profitable you can become. This relationship is not linear. Like any network effect businesses, economic rents are distributed via a power law. Here’s what the power law looks like for TV, specifically, thanks to Matthew Bell of REDEF:

Those networks in the the 10B+ monthly minute bracket (e.g. Fox, NBCU, Time Warner, Viacom) earn the vast majority of the profits of a $73B domestic TV advertising industry, while those with fewer than 10B monthly minutes are left to fight for the scraps.

The power law that benefits old TV media, however, will make its downfall that much more dramatic. If viewership continues its monotonic decline, even the largest offline TV media networks will quickly find themselves on the elbow of that curve — fighting for the profitability they once took for granted. Once that happens, the decline will be sudden.

Who will benefit from the unraveling of old TV media?

The most obvious beneficiaries of the decline of old TV media will be the dominant social networks who nail video: Facebook, Snapchat,* and perhaps Twitter, if the whole Periscope thing works out. (A new social network built natively with video could also be a contender. Email me if that’s what you’re working on!) They each have their own power law dynamics and, by most measures, are significantly larger and more global than the TV networks. Their data allows them to target videos more precisely; so, despite larger quantities of social video in the world, the odds of a specific consumer engaging with a given video are (in theory) much higher. If properly executed, they could expand the $73B TV advertising market today by transforming it from an audience- to a performance-based medium.

The second group of beneficiaries will be the new stream aggregators: Netflix, Amazon, YouTube, Twitch, and the like. These streams will continue to aggregate and package long tail content and form direct relationships with consumers. Again, there will only be a few winners here. We will hit a ceiling on the number of subscriptions the average consumer can afford, both in terms of time and money. Netflix’s outsized growth is evidence that consumers prefer a consolidated channel for streaming content:

The third group of beneficiaries will be internet-native news networks like Cheddar,* but also potentially companies like Vice, Buzzfeed, and Mic.* By focusing on the millennial generation and its unique needs, as well as optimizing for new social and streaming distribution channels, they will continue to gain their share of the viewers on these new platforms. (For more on these opportunities, check out my partner Jeremy Liew’s excellent post “For the new video platforms are created, the killer apps will be shows and channels.”)

At Lightspeed, we believe TV has a bright future — on the internet. Declining offline viewership will, at some point in the next 5–10 years, create a crisis moment for the legacy TV networks. We hope that founders won’t let this crisis go to waste. It might be the best time ever to build a new media company.

* Disclaimer: Lightspeed is an early investor in Snapchat, Cheddar, and Mic. We’re also investors in some yet-to-be announced video startups that we’re pretty darn excited about!

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Lightspeed is a VC firm focused on accelerating disruptive innovations and trends in the enterprise and consumer sectors. Lightspeed has backed 350+ companies globally in the past two decades including Snap, Honest Co., GIPHY, Nest, Nutanix, AppDynamics and MuleSoft.

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